[Korea] Entertainment November 12, 2020

YG Entertainment Trading Buy (122870 KQ ) (Maintain)

Returning to normalcy TP: W51,000 Upside: 19.2%

Mirae Asset Daewoo Co., Ltd. Jeong -yeob Park [email protected]

3Q20 review : Better than Consolidated revenue of W 66 .8bn (+8.5% YoY ) and OP of W 3.2bn (turn to profit YoY ) expected ó In 3Q20, YG Entertainment’s margins improved on: 1) the gradual resumption of artist activities from August; and 2) robust physical album/digital platform sales. ó Revenue from albums/digital music/goods grew 30.9% YoY. Album sales hit a quarterly high of 820,000 copies (360,000 copies for BLACKPINK and 460,000 copies for Treasure). ó Around 76% of digital music sales came from overseas (vs. 24% for domestic), underscoring the company’s potential for growth through global expansion. ó Revenue from Google jumped from W2bn to over W4bn, fueled by YouTube subscriber growth and the release of BLACKPINK’s hit single. ó Despite overall constraints on artist activities, management revenue (-5.1% YoY) held up well thanks to ad/ album production. Expanded global lineup Given expanded lineup, earnings could grow strongly in 2021 on a return to normalcy ó Looking to 4Q20, we expect BLACKPINK/Treasure/Song Min-ho (album sales and activities) and AKMU (digital music sales) to drive robust earnings. ó We are encouraged by the company’s growing digital music base (YouTube and QQ Music) and expanding advertising income sources. ó Meanwhile, the company has successfully expanded BLACKPINK’s global fan base and established Treasure’s presence in Japan by focusing on content offerings in 2020. ó In 2021, expected concert attendance levels could sharply increase on the back of G-Dragon’s comeback and the execution of online/offline concerts . Recommendation and valuation Look toward resumption of offline concerts ó We keep our Trading Buy rating and target price of W51,000, which is based on 25x (three-year average) our 2021F EPS. ó Key achievements in 2020: Global lineup expansion (from one to three groups) and enhanced power of albums/digital music ó Key upside risks: Artist activities (G-Dragon , Lisa, etc.) in China and execution of online/offline concerts ó We believe the stock has overreacted to external headwinds. We could see sharp gains ahead if concerts and G-Dragon’s activities begin to resume. ó We advise taking a more positive stance on the company’s stock, but note that the earnings and stock supply/demand of a major peer could affect share performance in the near term.

Key data

Current price (11/11/20, W) 42,800 Market cap (Wbn) 788 250 YG Entertainment KOSDAQ OP (20F, Wbn) 6 Shares outstanding (mn) 18 200 Consensus OP (20F, Wbn) 10 Free float (%) 68.2 150 EPS growth (20F, %) - Foreign ownership (%) 11.9

100 P/E (20F, x) 120.4 Beta (12M) 0.88

50 Market P/E (20F, x) 16.8 52-week low (W) 19,450 11.19 3.20 7.20 11.20 KOSDAQ 839.90 52-week high (W) 58,700

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2016 2017 2018 2019 2020F 2021F Absolute -14.1 42.4 64.3 Revenue (Wbn) 322 350 269 264 240 332 Relative -10.8 16.2 29.4 OP (Wbn) 32 24 20 1 6 40

OP margin (%) 9.9 6.9 7.4 0.4 2.5 12.0 NP (Wbn) 19 18 18 -22 7 37 EPS (W) 1,094 931 911 -1,118 356 2,014 ROE (%) 7.7 5.7 5.1 -6.2 1.9 10.3 P/E (x) 25.9 31.0 52.2 - 120.4 21.3 P/B (x) 1.8 1.6 2.6 1.5 2.3 2.1 Div. yield (%) 0.7 0.5 0.3 0.0 0.0 0.0 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. November 12, 2020 YG Entertainment

Table 1. Valuation (Wbn)

Valuation - P/E 2020F 2021F Fair market cap 927 927 NP 7 37 Target P/E (x) 139.3 25.0 Avg. P/E (three years) Fair price (W) 51,000 51,000 19.2% upside Source: Mirae Asset Daewoo Research

Table 2. Quarterly and annual earnings (Wbn, %, mn tickets, %p) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20P 4Q20F 2019 2020F 2021F Revenue 65 78 64 58 53 55 67 66 264 240 332 Products 19 26 23 22 17 17 30 28 90 92 124 Management 43 50 38 43 36 38 37 38 175 149 208 Gross profit 17.3 22.5 18.1 22.5 17.3 20.0 21.7 22.9 80 82 117 OP -2.7 -0.1 -3.2 6.9 -2.5 1.5 3.2 4.3 1 6 40 OP margin (%) -4.4 -0.1 -5.2 11.9 -4.8 2.6 4.8 6.6 0.3 2.5 12.0 Pretax profit 14.3 -9.3 -7.7 0.6 -5.7 14.4 3.5 5.2 -2 17 44 NP 7.3 -6.4 -6.4 -19.2 -8.9 7.5 1.6 4.1 -25 4 34 Net margin (%) 11.3 -8.1 -10.0 -33.2 -16.8 13.6 2.4 6.3 -9.3 1.8 10.2 NP attributable to owners 8.4 -6.1 -4.8 -19.0 -4.2 7.2 1.0 2.6 -21.5 6.7 37.1 YoY Revenue -16.3 24.5 -2.3 -9.1 -18.3 -29.4 8.5 13.0 -1.7 -9.1 38.1 Products -2.9 -0.9 -22.6 -14.4 -12.0 -33.2 30.9 25.3 -11.2 2.2 35.0 Management -26.1 36.0 9.1 -20.9 -15.2 -24.1 -5.1 -12.6 -5.5 -14.9 40.0 Gross profit -15.4 3.4 -16.1 -14.4 -0.1 -10.8 20.1 1.5 -10.7 1.9 42.6 OP TTR TTR TTR -50.0 RR TTB TTB -37.4 -95.5 628.5 518.9 NP 837.0 RR TTR TTR TTR TTB TTB TTB TTR TTB 672.5 Major assumptions Japanese concert ticket sales volume 0.1 0.0 0.2 0.1 0.2 0.0 0.0 0.0 0.4 0.2 1.2 Source: Company data, Mirae Asset Daewoo Research

Figure 1. Robust album sales growth in 3Q20 for YG Entertainment

('000) 1,600

1,200

800

400

0 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20P 4Q20F

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 November 12, 2020 YG Entertainment

Figure 2. YG’s YouTube-related revenue is estimated to have grown sharply in 3Q20

(Wmn) 5,000

4,000

3,000

2,000

1,000

0 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20P

Source: Mirae Asset Daewoo Research estimates

Figure 3. YouTube views by label: Increasing in line with new album releases

(mn views) 800 SM (SMTOWN) JYP (jypentertainment + TWICE) YG (YG ENTERTAINMENT + BLACKPINK + iKON + WINNER) 600 Big Hit (Big Hit Labels + BANGTANTV)

400

200

0 8/15 12/15 4/16 8/16 12/16 4/17 8/17 12/17 4/18 8/18 12/18 4/19 8/19 12/19 4/20

Source: YouTube, Mirae Asset Daewoo Research

Figure 4. YouTube channel subscriptions by label: Global growth continues

(mn) 100 SM (SMTOWN) 90 JYP (jypentertainment + TWICE) YG (YG ENTERTAINMENT + BLACKPINK + iKON + WINNER) 80 Big Hit (Big Hit Labels + BANGTANTV) 70 60 50 40 30 20 10 0 9/15 1/16 5/16 9/16 1/17 5/17 9/17 1/18 5/18 9/18 1/19 5/19 9/19 1/20 5/20 9/20

Source: YouTube, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 November 12, 2020 YG Entertainment

YG Entertainment (122870 KQ)

Income statement (summarized) Balance sheet (summarized) (Wbn) 2018 2019 2020F 2021F (Wbn) 2018 2019 2020F 2021F Revenue 269 264 240 332 Current assets 233 160 187 229 Cost of revenue 179 184 158 215 Cash & equivalents 59 48 60 76 GP 90 80 82 117 AR & other receivables 30 19 21 29 SG&A expenses 70 80 75 77 Inventory 23 16 18 25 OP (adj.) 20 1 6 40 Other current assets 121 77 88 99 OP 20 1 6 40 Non-current assets 362 356 336 360 Non-operating profit 17 -3 11 4 Investments in associates 24 23 26 36 Net financial income 5 2 1 1 PP&E 105 149 162 152 Net income from associates 0 0 0 0 Intangible assets 61 52 49 49 Pretax profit 37 -2 17 44 Total assets 594 516 523 589 Income tax 12 12 9 11 Current liabilities 63 77 89 121 Profit from continuing operations 25 -14 8 34 AP & other payables 32 33 37 52 Profit from discontinued operations -9 -11 -4 0 Short-term financial liabilities 3 13 17 22 NP 16 -25 4 34 Other current liabilities 28 31 35 47 Attributable to owners 18 -22 7 37 Non-current liabilities 82 18 18 19 Attributable to minority interests -2 -3 -2 -3 Long-term financial liabilities 80 17 17 17 Total comprehensive income 17 -24 5 34 Other non-current liabilities 2 1 1 2 Attributable to owners 19 -21 9 59 Total liabilities 145 95 107 140 Attributable to minority interests -2 -3 -4 -26 Equity attributable to owners 359 337 342 379 EBITDA 28 19 21 53 Capital stock 9 9 9 9 FCF -1 19 -10 46 Capital surplus 209 210 210 210 EBITDA margin (%) 10.4 7.2 8.8 16.0 Retained earnings 140 115 122 159 OP margin (%) 7.4 0.4 2.5 12.0 Minority interests 90 85 73 70 Net margin (%) 6.7 -8.3 2.9 11.1 Shareholders' equity 449 422 415 449

Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2018 2019 2020F 2021F 2018 2019 2020F 2021F Operating cash flow 22 60 15 48 P/E (x) 52.2 - 120.4 21.3 NP 16 -25 4 34 P/CF (x) 35.6 30.3 37.4 14.2 Non-cash income/expenses 10 42 17 22 P/B (x) 2.6 1.5 2.3 2.1 Depreciation 4 14 12 11 EV/EBITDA (x) 32.1 30.0 37.5 14.5 Amortization 4 3 2 2 EPS (W) 911 -1,118 356 2,014 Other 2 25 3 9 CFPS (W) 1,335 903 1,144 3,016 Chg. in working capital -2 43 -3 2 BPS (W) 18,407 18,508 18,584 20,598 Chg. in AR & other receivables 6 7 -1 -7 DPS (W) 150 0 0 0 Chg. in inventory -9 4 -4 -7 Dividend payout ratio (%) 17.0 0.0 0.0 0.0 Chg. in AP & other payables -15 4 -2 6 Dividend yield (%) 0.3 0.0 0.0 0.0 Income tax -16 -15 -6 -11 Revenue growth (%) -23.1 -1.9 -9.1 38.3 Cash flow from investing activities -66 12 13 -28 EBITDA growth (%) -17.6 -32.1 10.5 152.4 Chg. in PP&E -23 -40 -24 -1 OP growth (%) -16.7 -95.0 500.0 566.7 Chg. in intangible assets -2 1 1 -2 EPS growth (%) -2.1 - - 465.7 Chg. in financial assets 153 14 -8 -25 AR turnover (x) 8.9 13.9 14.7 16.1 Other -194 37 44 0 Inventory turnover (x) 12.9 13.5 14.1 15.4 Cash flow from financing activities 1 -83 -10 5 AP turnover (x) 16.3 16.0 11.6 12.4 Chg. in financial liabilities 7 -54 4 5 ROA (%) 2.7 -4.4 0.8 6.1 Chg. in equity 0 0 0 0 ROE (%) 5.1 -6.2 1.9 10.3 Dividends -3 -3 0 0 ROIC (%) 7.3 3.0 2.8 15.0 Other -3 -26 -14 0 Debt-to-equity ratio (%) 32.2 22.5 25.8 31.2 Chg. in cash -40 -11 13 15 Current ratio (%) 371.2 209.3 210.0 189.1 Beginning balance 99 59 48 60 Net debt-to-equity ratio (%) -13.4 -4.6 -19.9 -20.9 Ending balance 59 48 60 76 Interest coverage ratio (x) 10.3 0.4 8.1 44.1 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 November 12, 2020 YG Entertainment

Appendix 1

Important disclosures and disclaimers Two-year rating and TP history

Company Date Rating TP (W) (W) YG Entertainment YG Entertainment (122870) 08/13/20 Trading Buy 51,000 80,000 05/14/20 Trading Buy 36,000 02/27/20 Buy 40,000 60,000 11/29/19 Hold 05/14/19 Buy 49,000 40,000 10/24/18 Buy 60,000 20,000

0 Nov 18 Nov 19 Nov 20

Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse

Rating and TP history: Share price (─), TP (▬), Not Rated ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 73.62% 14.11% 11.04% 1.23% Investment banking services 72.22% 11.11% 16.67% 0.00% * Based on recommendations in the last 12 months (as of September 30, 2020)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Analyst certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director, or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading, and private client divisions. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws, and accounting principles, and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person, and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents

Mirae Asset Daewoo Research 5 November 12, 2020 YG Entertainment

do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views, and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making, or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.

Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: Mirae Asset Daewoo is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934, as amended. All U.S. persons that receive this document by their acceptance hereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc. Mirae Asset Securities (USA) Inc. accepts responsibility for the contents of this report in the U.S., subject to the terms hereof, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Mirae Asset Daewoo. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This report is distributed in Hong Kong by Mirae Asset Securities (HK) Limited, which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All other jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

Mirae Asset Daewoo Research 6 November 12, 2020 YG Entertainment

Mirae Asset Daewoo International Network

Mirae Asset Daewoo Co., Ltd. (Seoul) Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. One-Asia Equity Sales Team Units 8501, 8507-8508, 85/F 41st Floor, Tower 42 Mirae Asset Center 1 Building International Commerce Centre 25 Old Broad Street, 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 1 Austin Road West London EC2N 1HQ Korea Kowloon United Kingdom Hong Kong Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

Mirae Asset Securities (USA) Inc. Mirae Asset Wealth Management (USA) Inc. Mirae Asset Wealth Management (Brazil) CCTVM 810 Seventh Avenue, 37th Floor 555 S. Flower Street, Suite 4410, Rua Funchal, 418, 18th Floor, E-Tower Building New York, NY 10019 Los Angeles, California 90071 Vila Olimpia USA USA Sao Paulo - SP 04551-060 Brazil Tel: 1-212-407-1000 Tel: 1-213-262-3807 Tel: 55-11-2789-2100

PT. Mirae Asset Sekuritas Indonesia Mirae Asset Securities (Singapore) Pte. Ltd. Mirae Asset Securities (Vietnam) LLC Equity Tower Building Lt. 50 6 Battery Road, #11-01 7F, Saigon Royal Building Sudirman Central Business District Singapore 049909 91 Pasteur St. Jl. Jend. Sudirman, Kav. 52 -53 Republic of Singapore District 1, Ben Nghe Ward, Ho Chi Minh City Jakarta Selatan 12190 Vietnam Indonesia Tel: 62-21-515-3281 Tel: 65-6671-9845 Tel: 84-8-3911-0633 (ext.110) Mirae Asset Securities Mongolia UTsK LLC Mirae Asset Investment Advisory (Beijing) Co., Ltd Beijing Representative Office #406, Blue Sky Tower, Peace Avenue 17 2401B, 24th Floor, East Tower, Twin Towers 2401A, 24th Floor, East Tower, Twin Towers 1 Khoroo, Sukhbaatar District B12 Jianguomenwai Avenue, Chaoyang District B12 Jianguomenwai Avenue, Chaoyang District Ulaanbaatar 14240 Beijing 100022 Beijing 100022 Mongolia China China

Tel: 976-7011-0806 Tel: 86-10-6567-9699 Tel: 86-10-6567-9699 (ext. 3300) Shanghai Representative Office Ho Chi Minh Representative Office 38T31, 38F, Shanghai World Financial Center 7F, Saigon Royal Building 100 Century Avenue, Pudong New Area 91 Pasteur St. Shanghai 200120 District 1, Ben Nghe Ward, Ho Chi Minh City China Vietnam

Tel: 86-21-5013-6392 Tel: 84-8-3910-7715

Mirae Asset Daewoo Research 7